How do You Know When You Can Afford to Buy a Home?

  • Posted 12 Jun

How do You Know When You Can Afford to Buy a Home?

Whether you’re hoping to buy your first home or thinking about getting into property investing, there are multiple factors that can help you decide whether or not to purchase a new home. Home prices in your neighbourhood, interest rates, and the country’s job market can all be deciding factors in housing affordability.



Below are some specific factors you’ll want to evaluate before you decide to take the next step in buying a home.


Renting vs. Buying

Steadily rising rental rates in your city or neighbourhood can make the prospect of owning a home seem more affordable.

While purchasing a home requires a considerable cash outlay (in terms of deposit and other fees), if you have a fixed rate mortgage then you’ll always know what your payments will be and you won’t have to worry that your cost of living will suddenly increase unexpectedly.

Of course the costs of home ownership can be variable and tend to be greater than the costs of renting, so these may balance each other out. But one of the best aspects of committing to ownership is that you won’t get priced out of an area where you enjoy living.

Interest rates are also a factor in deciding whether renting or buying makes more sense. Getting a lower interest rate on your mortgage can save you thousands over the life of your loan, so it’s important to get the best possible loan available to you.


However, the majority of home loans in Australia are variable rate loans, with an average length of 25 years. If you choose a variable rate mortgage then current low rates may not have a long-term positive impact on your home’s affordability. You can expect to see your payments rise if rates go up over time. The best way to avoid this is to get a fixed rate mortgage.


Your Income Prospects

The amount of money you’ll make over time has a huge effect on home affordability. This is doubly important if you want to get into property investing, where you may have to cover multiple mortgages if you have tenant problems or empty rental properties.


The quarterly wage price index put out by the Australian Bureau of Statistics (ABS) offers a broad measure of average wages vs. the price of household goods. Other measurements include the census every five years and the biannual Household Income Survey.


These measures look at the general trends of household affordability, but of course you’ll also want to keep an eye on unemployment measures. Home affordability is negatively affected by job loss or wage cuts. And in times of job instability, the purchase of homes may fall even if home prices are declining. So it’s wise to look at the long-term prospects for your industry and what you expect your average pay rise to be over the years to come. This is where having savings is also key as well as the right insurances in place.



Local Property Values

It’s a fact of life that some geographic areas are more expensive than others. Some real estate markets are rising but offer first time home buyers a bargain on smaller starter homes, while other markets are overpriced and have values that likely aren’t sustainable.


Working with a qualified seller’s agent can help you find the best match between home affordability and property values.



Are you thinking about property investing or purchasing a new home? Contact Australian Credit and Finance to work with our home loan experts today.

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